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The European Commission
proposed March 21 a 3 percent turnover tax on large internet companies such as Amazon.com
Inc., Google Inc., and Facebook Inc. in order to force them to pay their share of
“fair” taxes where revenues are generated.

Digital companies with an annual global turnover of 750 million euros ($920 million)
and 50 million euros in sales in the EU would be subject to the turnover tax. Most
of the eligible digital companies are U.S.-based multinationals.

The tax would be imposed on the advertising profits on a country-by-country basis
earned from online platforms such as search engines or social media sites.

In addition, large “intermediate” online merchants and service providers such as Amazon
and Ebay Inc., as well as Airbnb Inc. and Uber Technologies Inc., would be assessed
for a 3 percent levy.

Interim Measure

Deemed an “interim” measure, the turnover levy is part of a two-pronged approach to
adapt EU corporate tax law to the rapid growth of the digital economy.

The “permanent” part of the reform calls for an amendment to the pending common corporate
tax base legislation to include “virtual permanent establishment” companies, netting
online-based businesses.

“Our pre-internet rules do not allow our member states to tax digital companies operating
in Europe when they have little or no physical presence here,” European Commission
Taxation Commissioner Pierre Moscovici said in a statement.

He insisted that companies such as Google and Facebook pay half the tax rate of traditional
companies and this “adds an ever-bigger black hole for member states because the tax
base is being eroded.” He also said the new interim tax would add a minimum of 5 billion
euros ($6.1 billion) in tax revenue in the EU.

All 28 EU member states must approve the proposal before it becomes law. Ireland,
where a number of large U.S. Internet companies are based, as well as other EU countries,
insists the EU must wait for a global consensus from the Organization for Economic
Cooperation and Development before the interim turnover tax can be approved.

Irish Finance Minister Paschal Donohoe issued a March 21
statement noting that the OECD failed to find a consensus on digital taxation in its March
16 interim report. “This is the beginning of a process that will go on for sometime
in parallel with the work of the OECD,” Donohoe said.

OECD ‘Impulse’

However, the five largest EU member nations—Germany, the U.K., France, Italy and Spain—issued
a March 21 statement insisting the interim turnover tax proposal should be an “impulse”
for the OECD process as well as for the Group of 20 nations. Meanwhile, they said
the plan provides a basis for “coordinated EU action to effectively align the taxation
of highly digitized business profits with the place where value is created.”

In the past year, Hungary, Slovakia and Italy adopted national digital online turnover
tax regimes targeting large internet companies. These moves, the commission said,
make an EU turnover tax urgent.

“By agreeing on a coordinated EU-wide approach we will ensure the integrity of the
digital single market,” the five EU member nations said in their statement.

The U.S. Chamber of Commerce to the EU, which includes some of the tech companies
impacted, also weighed in on the issue by insisting the commission’s interim turnover
tax “may make it more difficult” to find consensus in the OECD.

Tax Data Challenge

The claim that large digital companies pay less tax than traditional companies is
disputed by some economists, including University of Stuttgart-based Christoph Spengel,
who has completed various corporate tax studies for the European Commission. He told
Bloomberg Tax in a March 20 email that “effective tax rates for digital and traditional
businesses cannot be compared one-by-one” because digital businesses earn different
types of income, such as royalties.

The new turnover tax is also expected to further strain EU-U.S. trade tensions—already
troubled because of pending U.S. steel and aluminum tariffs that could hit EU companies.

“This tax can be seen as the world’s first digital service tariff,” Edwin Visser,
tax partner and member of PwC’s global tax policy group, told journalists March 20
in a conference call.

“By our estimates, there are between 120 and 150 companies that would be in the scope
of the tax, and one-third of those are European or Asian,” Moscovici said.

The former French finance minister acknowledged that the preferred solution to the
issue of digital tax is an amendment to the common consolidated corporate tax base
that would establish a virtual permanent establishment. The threshold for which companies
would be included in the scope of the PE would be: a threshold of 7 million euros
($8.54); more than 100,000 users in a member nation; and more than 3,000 business
contracts for digital services created between the company and users in a taxable
year.

However, EU member nations have been unable to make progress on the CCCTB since it
was first proposed in 2011. Small low-tax EU members oppose any kind of an apportionment
formula that would require them to transfer tax revenue to another EU nation.

EU Leaders to Weigh In

The heightened political, economic, and trade implications of the new turnover corporate
tax reform proposal tax proposal pushed European Council President Donald Tusk put
it on the March 22 agenda of an EU summit to be attended by the 28 EU leaders.

Further underscoring how politicized the issue of taxing the digital economy has become,
most of the leading internet companies contacted by Bloomberg Tax refused to comment.
However, the Computer & Communications Industry Association, speaking on behalf of
members that include Amazon, Google, Facebook, Ebay and Uber, sharply criticized the
proposal. In a March 21 statement, it said targeting online platforms is “discriminatory”
and harmful to the growth of the digital economy.

“This ignores the global consensus that the so-called ‘digital economy’ should not
be singled out,” the CCIA said in a
March 21 statement. “Our economies are increasingly digital and digital companies pay as high of an
effective corporate tax rate as traditional companies.”

Investment Disincentive

For an online merchant like Amazon, the intermediate tax on online platforms will
have a minimal impact on its online retail operations, as most of its profits are
earned from direct sales, which are exempted from the turnover tax.

“The key problem with this proposal is that it favors non-EU-based online platforms
that sell to EU citizens via small merchants in the EU, as the tax will not apply
to them,” said an Amazon official, who spoke to Bloomberg Tax on the condition of
anonymity. “This will certainly be a disincentive to invest in the EU.”

Facebook Spokeswoman Ana Gradinaru said the Silicon Valley company would have nothing
more to say other than to emphasize that as of December 2017, the company decided
to book its advertising revenues in the EU member nations where they are earned and
not through its European headquarters in Ireland.

Google, Airbnb,. and Uber didn’t respond to requests for comment from Bloomberg Tax.

The turnover proposal wouldn’t apply to online streaming services such as Netflix
Inc. or Spotify Ltd.

Discrimination Legal Challenge?

As for whether companies targeted by the tax would have legal grounds for a discrimination
complaint, Joachim Englisch, a professor of corporate tax law at the University of
Muenster in Germany, told Bloomberg Tax it would be possible the companies could file
an appeal based on Article 20 of the EU Charter of Fundamental Rights, which assures
non-discrimination.

“This scenario is particularly likely if the proposal should be adopted only by a
smaller group of member states using the so-called enhanced cooperation procedure,”
Englisch said in a March 20 email. Enhanced cooperation is a legislative procedure
that allows EU member nations to move ahead with legislation when unanimous consent
can’t be achieved.

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